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Wait A Minute... Why Is The Fed Continuing QE?
It wasn’t a big surprise for the financial markets to see the Federal Reserve hike the interest rate by 0.25% last week, and the stock market moved swiftly higher on the back of this announcement which has removed some uncertainty.
Source: propertyobserver.com.au
As expected, the interest rate was hiked by 0.25% citing better circumstances on the US labor market, and this move was widely anticipated and expected. What’s more important than the effective rate hike, are the comments surrounding this decision. The Federal Reserve has acknowledged the inflation rate hasn’t reached the eyed 2% yet (well, at least not officially), and it will continue ‘to monitor actual and expected progress toward its inflation goal’. The choice of words is pretty important as the Federal Reserve also said it expects the economic conditions to remain ‘evolve in a manner that will only gradual increases in the federal funds rate’. In other words, the American economy isn’t ready yet for more rate hikes, and that’s the main reason why the markets were so enthusiast right after the announcement was published.
Maybe even more important was the statement in the final paragraph, which was a real ‘aha-erlebnis’. Despite increasing the interest rate, pretending the situation of the American economy is much better now, the Federal Reserve said it would continue to reinvest the proceeds of the maturing agency debt and mortgage backed securities as well as the income on existing securities into new ones. This basically is a continuous ‘soft’ Quantitative Easing, something we already pointed out in a previous column, published in October 2014.
Source: Federal Reserve
As you can see on the previous image, the total value of the mortgage-backed securities on the balance sheet of the Federal Reserve continues to increase. Yes, it has slowed down, but if you’d zoom in on the one-year chart, you’ll clearly see the Fed’s balance sheet is still expanding and since the first week of May, the amount of MBS’ on the balance sheet has increased by an additional 2%.
Source: Federal Reserve
And if you’d look at the size of the total balance sheet of the Federal Reserve, you’ll clearly see the balance sheet hasn’t been reduced but actually has increased in the past few months. Granted, the increase is less outspoken, but the total balance sheet has expanded by roughly 1% in the past six months. Not exactly a clear sign the Federal Reserve ‘really’ believes in the US economy.
Source: Federal Reserve
This could be seen as an indecisive move by the Fed, and the rate hike is partly being compensated by the Fed’s continuous involvement on the mortgage and asset backed securities as the total value of the MBS on the balance sheet continues to increase, as does the total amount of assets on said balance sheet.
The first step to try to convince the world (and probably themselves as well) the American economy is doing just fine has been made, but we aren’t confident to see additional steps anytime soon.
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when the Fed says that inflation hasn't reached 2% it is with the caveat that they are measuring energy, (whcih has a negative effect) and core inflation does not measure food or energy. this is FED BLASPHEMY. Yellen should be burned at the stake.
any deflationary crash like the one in energy can turn on a dime. it comes at the moment suppliers realize that six months from now their product will be worth twice what it is now, and they withhold supply and that becomes a self fulfilling prophecy. does Yellen want $100 oil, she wants to reinflate the asset class in general, otherwise it will pull down housing and even her beloved equity market.
then she can safely raise rates and provide LIQUIDITY through RREPO, eventually the banks will let that money out, but i suspect the corporate loan sharking business will create its own bubble, payday lenders, etc. once they burst that bubble the banks can get back to what they do best, usuary. credit scores may not matter because you will pay to play.
Living proof that a little knowledge (or none) is a dangerous thing. A deflationary 'crash' (as you call it) only ends when demand grows faster than supply again. Withhold supply? Lol. All of the reserves are full and they still keep pumping. Exactly what do you think will be the catalyst that will make all the suppliers say "I'm not going to pump any more"? You can't run a company or country without cash flow. The urge to cheat in an oligolpoly is too strong. Un-manipulated price moves with supply and demand.
You DON'T provide liquidity through reverse repos. You remove it from the system, if you're talking from the FED perspective. Reverse Repos. Read up on it.
Grateful : You had me at "Yellen should be burned at the stake" ....
Gold Double Bottom and Bitcoin:https://youtu.be/I7_F3tp969M
Apart from being insubstantial rainbow skittle shitting fart dust electrons, Bitcoin value bounces around like a hyperkinetic child that just ate 3 dozen donuts, washed down with a case of Red Bull.
That kind of volatility makes HFT market manipulation look like TV Seniors lawn bowling.
I will take the gold double bottom, and Buy The Fucking Dips, Bitchez, all day long as a logical investment as a result.
yeah cause the price of bitcoin and gold have never been manipulated.................
I'm very curious, I must confess, as to how the FED got the FED rate up from 0/15% to 0.37% without withdrawing any liquidity (of any size) from the markets? The only thing that I could think of is that all the major financial institutions agreed that they would set their rates not based on demand - but just lock them at that level (much the same way they set any other loan rate)? the fed funds rate is a volume-weighted average of rates on trades arranged by major brokers. The effective rate is CALCULATED BY THE FEDERAL RESERVE BANK OF NEW YORK USING DATA PROVIDED BY THE BROKERS AND IS SUBJECT TO REVISION.
Maybe the FED is just making up the rate, and then the brokers will fall in line because they don't want to bite the hand that feeds them? I'm reallyl falling down the rabbit hole on this one. The FED is really unable to raise rates (by pulling liquidity fromt he market), so they just fake the rate hike so that they can point and say "See? It's working" since nothing has changed except a fake number.
EDIT: The New York Fed says how it's done without draining liquidity from the market here. All they did was give themselves the power to pay interest on excess balances. They raised the interest they pay. Therefore, if any bank wants to borrow the excess from any other bank, they will have to pay that rate - or the lending bank would just deposit the money with the New York Fed as an excess balance. There you go. The Fed Funds Rate is no longer an indication of market conditions. It just indicates the rate that the New York Fed will print money at and pay out on excess balances that banks deposit with it. My second paragraph above is correct. The FED is just making up the number and the New York branch says "we'll pay that rate on excess balances that banks deposit with us (after all we just print the money so it can be any rate we want). There is no market determining the rate. There is no withdrawal of liquidity. Do NOT look for the equity markets to implode. It's business as usual. Commodities will continue their course as dictated by supply and demand, because the growth in supply has exceeded the ability to use leverage to grow the commodity paper that would raise the price - ie inflation.
And that is why banks are raising all their lending rates but not their deposit rates. With no liquidity withdrawal by the FED, there is no need to find other sources of funding.
reverse repo, read up on it.
They have not increased the reverse repo. Liquidity is not being drained. Apparently you missed that ZH post. Maybe you should do a bit more reading yourself. Here. I'll help you get past your snarkiness. Read here,
Will keep "beating the dead horse": [covert] QE to infinity / till the "the fat/old" lady cries/croaks".
The currency/interest swaps, RRP, discount rate, tongue-in-cheek pronoucements/gibberish etc is probably useful for day-to-day tweaking/manipulation.
But the big bullet in the chamber is the PPPT activities via covert "special 'facility' windows".
Why is Yellen freaking out about a possible Rand Paul initiative to audit the "Fraud Preserve's" financial activities?
Are the odds increasing that the whole charade will "reset" on Yellen's watch?
If so, what does that imply about "Her/"Its" level of intelligence / sanity / complicity / intent?
I'll pull it out before I cum, I promise!
Oooooooo! Such metaphorical and terse comment of comic relief!
Maybe they are going to sell all that mortgage backed debt to newly allowed foriegn investors......
" allowed foreign 'investors' "
Would that possibly be " undocumented 'migrants' " becoming "DOCUMENTED":
1) "migrants" being allowed to enter without prior "authorization".
2) said "migrant" then being "offered" executive-branch-ordered "legal" alien status.
3) said "migrant" eagerly signs acceptance with "authorizing" signature.
4) multi-million dollar bond is then generated upon said "authorizing" signature.
5) said "migrant" has just "authorized" the issuance of more fiat debit into the "system".
If this sounds completely fantastical, consider this:
1) why are the PTB (Psychopaths That Bugger) allowing this migration thing to happen?
2) why are said "migrants" being provided so much government financial "asssitance"?
3) would the basic elements of contract/trust law possibly be applicable in what are mostly administrative and equity courts now?
"...but if you’d zoom in on the one-year chart, you’ll clearly see the Fed’s balance sheet is still expanding and since the first week of May, the amount of MBS’ on the balance sheet has increased by an additional 2%."
See? They raised rates because they hit their 2% inflation goal!
the Fed PLACED 105B on the balance sheets of the banks through reverse repo AND they are not draining reserves from their balance sheet. anyone can do the math. its QE, its doesnt amount to as much as the full QE of 85B a month, but they could kick UP the RRPO in the coming months if they so desired. i have been saying that the Fed can do QE AND they can RAISE RATES and that is correct.
the criticisms of the Fed are often so puerile as to be laughable. these people are very pragmatic, that is why they ignore the data. they're currentlyh ignoring core inflation in favor of an inflation outlook which factors in energy (weakness) . that may come back to bite them. there is also talk of raising the inflation target to 3%, that was trial balloned a few months ago.
the last election cycle the markets crashed, and the fed is aware of this so they have put added reserves in MM accounts and on bank balance sheets. the RE (bubble) market is being held up cash buyers from Asia, in order to keep some order in that market they have to keep lending rates low.
for historical reference check the late 1970s. the end of a long war which the US did not win, and the oil embargo (low prices encourage the sellers to withhold supply, and wait for higher prices) as the prospect of inflation kicks in the fed will be able to raise rates, in that instance not fast enough and Volcker put his foot on the gas to bring inflation down, it was a great time for gold .
Yes indeed. I'm not sure why people don't realize that interest rate and QE are effectively two separate levers on their manipulation machine.
Also, 0% interest rates has some nasty albeit technical consequences. By raising those rates to 0.25% or 0.50% they can [mostly] eliminate those technical issues. And certainly 1.00% is [more than] sufficient.
So they may indeed have raised rates a bit to get rid of the nasty technical issues and consequences from near 0% interest rates... while pushing the QE lever higher to offset (and soon, more than offset).
In fact, I've been saying we can expect QE4ever to start soon, probably 2016Q1 but possibly 2016Q2. As this article makes clear, they never stopped QE, the just stopped increasing the size of QE... almost.
The other reason they raised rates now is... because they like to [appear-to] be in charge/control of these interest rate changes. Why? Because they and their cronies always make huge profits by knowing what is about to happen, and this time is no exception to that rule.
It's very obvious to those, who frequently visit this site, what the FED is doing and has been doing for some time. Those that screech that ZH is a bunch of "gold bugs" and "permabears", evidentially, have not taken the time to read, the thought provoking and salient posts that are published here daily for OUR benefit. Nor have they learned much from the comments section, (save for the sarcasm, snark and trolls) from which has, the most diverse, educated, experienced, sane, logical and common sense readers, from all walks of life and from all over the world...
The Tylers, contributors, WB7, and others work damm hard to make sure that this site has the best, up to the minute, breaking news and events of the day. We have all taken this for granted until it was interrupted this pastWednesday, at 2:00 EST....take a minute this week and thank all here, who literally, make it happen for the rest. Thanks ZH!
Sincerely,
The SillySalesman
The trolls actually serve ZH's purpose.
The responses to the trolls by our motley community are most enlightening as we expose their tactics and shred their faulty logic to pieces.
The agents of Government are learning rapidly that the tactic of the MANAGEMENT OF PERCEPTIONS is no longer affective and thus have responded by the outright CENSORSHIP as exemplified by the DOS attack on Zerohedge last Wednesday at 2PM EST.
They fail to understand that there are other venues for exposing their frauds and corruption that is being perpetrated upon the unwaty. And the truth is that we are a major headache and a thorn in their side as we successfully subvert their vain attempts at the Management of Perspective.
Anyone who seriously reads the material presented here is no longer a subject to them and will look at every report with a healthy skepticism.
They may be winning the battle with their fake Market, actually it is a Criminal Racket, but we are winning the war and winning the hearts and the souls of the victimized.
And that is a force which, sooner or later, they must confront with violence...
So I do want to extend a heartfelt thanks to the trolls as they do provide entertainment as well as giving us the opportunity to expose their lies and slander. I pray continuously that they are blessed by God Almighty in abundance and that they receive exactly what they deserve.
Merry Christmas to the trolls.
You had me right up until WB7
Amen bro!
So they're not adding new money, just applying any payments made. big deal. It's flows, not balance that moves the market. I don't think that this should have any effect beyond trying to maintain the head above water for the market. It's small potatoes compared to the money that needs to be pulled out (liquidity-wise), once jawboning fails and the new target rate slides lower.
Redeploying any income will work until the payments stop, right? Someday, someone is going to hear a knock at the door, and it will be Kevin Henry with a baseball bat looking for the monthly payment. If they can't pay, the B/S will shrink.
And as a key member of the Plunge Protection Team, a true audit would show the digits of fiat going to stock and bond purchases. For the Fed to raise rates is a simple matter of not buying as many bonds. The only way they kept rates down was scarfing up the bonds dumped onto the market.
David Stockman's tour-de-force last week, basically 'put-to-bed' this cockamamie nonsense regarding the targeted 2% inflation rate.
Who Owns the Federal Reserve Bank and Why is It Shrouded in Myths and Mysteries?http://www.counterpunch.org/2015/12/18/who-owns-the-federal-reserve-bank-and-why-is-it-shrouded-in-myths-and-mysteries/
Ismael Hossein-ZadehIsmael Hossein-zadeh is Professor Emeritus of Economics (Drake University). He is the author of Beyond Mainstream Explanations of the Financial Crisis (Routledge 2014)
http://www.rense.com/general27/gad.htm
Basically , this guy wants to take control of money from the greedy and stupid, and give it to the stupid and greedy.
http://www.zerohedge.com/news/2015-09-05/margin-debt-time-bomb = Margin debt time bomb
Crash of 1929 - Documentary https://www.youtube.com/watch?v=v_P_9T3DKn0 (45 min).
http://www.nyxdata.com/nysedata/asp/factbook/viewer_edition.asp?mode=tab...
Monthly volume of listings: Bonds, 1929
In socialism Governments own!
"The Federal Reserve has acknowledged the inflation rate hasn’t reached the eyed 2% yet ..."
The Fed will never reach the target of 2% inflation. even though prices are going up about 10% or so every year for consumers.
The Fed needs the "measured" inflation to stay at zero so they can continue to screw social security recipients and retirees out of cost of living adjustments, while simultaneously shafting savers.
Well, as your Biblical name implies, that's sorta what 'they' do best, isn't it...?
And nobody really wants to play ww3 with them just yet. Which is why civil war or race war is the back up plan
because they can.
The Fed did not reduce reserves at all. It initiated reverse repo’s which look to me like a street corner shell game.
More banker skullduggery... not only is the whole world awash in FRN’s, but the Fed might not be able to unload even a part of its mountain of toxic, worthless “reserves”.. so it resorts to shell games.
They want those FRN’s back out there in attempt to boost inflation.
That's another feather in the cap for gold which is neither a Ponzi bankers “asset” or “liability” (except in India where they are failing to make it both).
And another tidbit to bolster Mike Maloney’s contention of gold to the moon...
Notoriously misleading and unreliable Chinese reporting.. gold stockpile very likely to dramatically exceed official amount.. possibly even enough to gold back the yuan.
If gold goes to the moon, it will have proved to be a hedge that allows China to pretty much write off their western currency reserves.